What is it?
A new home is at once your greatest asset and your greatest expense. It's important to think about how your new mortgage fits in with your overall financial strategy, and how to safeguard your investment. To help, here are some common questions:
Is Now a Good Time to Buy a New Home?
Low interest income may be bad for savers, but it's great for borrowers.
There are many factors that can cause a low interest rate. One of the most common factors is a Federal Reserve Board interest rate cut. The Fed usually reduces the rate to help an ailing economy, by spurring on cash flow and buying power. Mortgage rates typically lower in anticipation of a cut.
The Mortgage Bankers Association of America Web site is a good place to learn more.
- Did You Know...?
Mortgages follow fluctuations in daily bond market yields.
How Can I Safeguard My Investment?
New York Life can help alleviate some of the worry that comes with ownership. There's always the concern that your family will face difficulties paying off the mortgage in the event that you become disabled* and cannot work, or suddenly die.
(* Disability insurance products available through one or more carriers not affiliated with New York Life, dependent on carrier authorization and product availability in your state or locality.)
This is why many mortgage contracts include a clause that states, "At the death of any signer, the contract is subject to renegotiation..." The loss of an income can lead to foreclosure. That's why a number of banks and mortgage companies encourage homeowners to purchase mortgage insurance, especially if your down payment is less than 20% of the home's price.
Basically, you have two options for safeguarding your mortgage: mortgage protection insurance (PMI) and personally-owned life insurance.
Three types of insurance can act as mortgage protectors:
- Term
- Whole life
- A blended product
Term Insurance
Term lets you purchase a large amount of insurance protection at a competitive price. It was designed to help people purchase the insurance they need at a limited period of time when money is tight. Term features include:
- Competitively priced, affordable protection;
- Guaranteed death benefit, no cash value;
- Coverage available in one year, five year, or other increments of time;
- Generally is convertible to permanent life insurance, without showing proof of insurability.
The downside is that, term insurance, whether it's purchased from a lending institution or an insurance company, builds no cash value. Unless you die within the specified period, your heirs do not receive any insurance proceeds. Wouldn't it be nice to have something to show for your years of consistently paying premiums? A portion of the premiums you pay for permanent insurance coverage builds cash value each year.
Whole Life Insurance
With whole life, you are insured for your entire lifetime, provided you pay all premiums due. And while you may initially purchase whole life insurance as a mortgage protector, you can access the cash value accumulation via loans* for other means, like college funding. The features of whole life include:
- Tax-deferred cash value accumulation;
- A level premium that's fixed for life;
- Ability to customize a plan by adding optional riders (based on underwriting requirements);
- Eligible to earn dividends**, as declared by a mutual insurance company;
- Guaranteed death benefit, generally free from federal income tax.
* Loans accrue interest and reduce the death benefit.
** Dividends are not guaranteed.
Blended Combination
Some insurance companies offer innovative plans that combine the guaranteed protection and cash value accumulation of whole life, with the affordability of term insurance. These plans are carefully crafted to meet the needs of today's growing families. As needs change, these plans allow you to convert the term portion into whole life. This will help boost your cash value accumulation in later years. Some of the features of these blended plans include:
- A lower initial premium than a comparable policy of 100% whole life;
- Flexibility to convert the term portion into permanent insurance;
- Tax-deferred cash value accumulation;
- Ability to customize the plan by adding optional riders (based on underwriting requirements);
- Eligible to earn dividends on the whole life portion of the plan, if and when declared by a mutual insurance company (Note: Dividends are not guaranteed.);
- Guaranteed death benefit, generally free from federal income tax.
PMI vs. Personally-Owned Life Insurance
PMI is a certain type of insurance policy from a bank or mortgage company in which you pay a fixed premium for a certain number of years to cover the risk of foreclosure. Should something happen to you while the policy is in effect, the insurance pays the remaining mortgage. The loan typically lasts for the life of the mortgage. As you pay off your mortgage, your end benefit goes down, too. At the end of the policy, the benefit is zero.
Personally-owned life insurance offers a different option. Essentially you pay the premiums, and your family gets the money — and the right to decide what to do with it.
Also, personally-owned life insurance is portable. This means if you move in a few years, you won't have to replace your insurance. This can save you a great deal of money since insurance rates usually increase as you get older.
New York Life offers a variety of insurance products that can help ensure your family's financial security — even after you've gone. Mortgage protectors include permanent life insurance, term life insurance, or a blended product. If purchased in an adequate amount, the death benefit can be used to help retire the mortgage as well as help your family solve other financial concerns.
Four Tips for Protecting Your Investment.
If you're like many people, your home may be your greatest single asset — an investment that will hopefully increase in value over time. You home may also be your greatest expense, and your largest debt. Safeguarding your investment starts at the beginning, with the mortgage itself. Here are some tips:
- Shop around for the best mortgage value when buying a home. Factors to consider include:
- Interest rates, points and length of mortgage. Make sure you are comfortable with the mortgage payments from the start.
- Buy the house you need, with the payment you can afford. And if you think that a few percentage points in the interest rate don't make much of a difference, think again.
- Always check the reputation and stability of the financial institution. It is common practice among some institutions to sell mortgages to companies which offer limited, if any, service after you sign. Ask before you sign.
- Shop around for refinancing. it maybe be time to review your mortgage and see if you can refinance at a better rate — and a lower monthly payment. The rule of thumb is that if you can get a rate at least two percentage points lower than your current one, refinancing may be your best bet.
- Be aware of the do's and don'ts of home equity loans. Home equity loans have become the primary source of instant cash for many families. There are two types of home equity loans. The first is a fixed loan, the traditional second mortgage. The second is an equity line of credit. Once the loan is approved, a sum of money is ready and waiting for you when you need it. It sometimes comes complete with check writing privileges. The interest on home equity loans can be tax deductible if you itemize deductions on your tax return.
Consider home equity loans as a source of financing when:
- You would ordinarily borrow money anyway — such as for home improvements or major repairs, college expenses, a new car.
- You expect to remain in your current home for several more years.
- You have a plan — and the means — to pay yourself back. A home equity loan should be used to help you achieve major objectives — not bail you out of trouble. And remember, you are borrowing from your own future.
Don't consider a home equity line of credit if:
- You are in a financial bind. If you're already strapped for cash, taking on the burden of that extra payment could jeopardize your home.
- You are thinking about using it to fund a vacation or some other well-deserved treat.
- Protect yourself and your family with adequate life and disability insurance, in addition to your homeowner's coverage. If you have a mortgage or home equity loan obligation, it is crucial that you carry adequate insurance on household income earners. As long as everyone remains alive and well, the debt will probably be paid off as planned. But what if one of you dies or becomes disabled?* That's where the insurance helps. It can provide needed cash at a critical moment to either pay off the debt or enable your family to continue making payments.
* Disability insurance products available through one or more carriers not affiliated with New York Life, dependent on carrier authorization and product availability in your state or locality.
- Did You Know...?
Unless you have a 20% down payment, most lenders require mortgage insurance.
- Did You Know...?
Let's say you borrowed $100,000 on a 30-year mortgage at 8% interest. Your monthly principal and interest payment come to $734. Not too bad, perhaps. However, consider that the total interest you will pay over the term of the loan will add up to more than $164,000 on top of the $100,000 principal, meaning you will repay a total of $264,000 on a $100,000 mortgage.
What Are Some Tax Advantages of Buying a New Home?
There are many tax advantages to buying a home. You may be eligible to deduct:
- Primary mortgage interest payments (if they exceed your standard deduction), generally up to $1 million. You should receive an annual summary from your lender, which you want to submit to the IRS with Form 1098, the Mortgage Interest Statement.
- Local property taxes from your federal taxes.
- Home equity loan interest, generally up to $100,000.
- Capital improvements, if they increase the value of your house. Save receipts and reduce capital gains by the amount. Tax Form 530 is required.
- Loans (and interest on the loans) for major improvements, if you rent out the house.
- Mortgage interest on second homes, if you rent them out.
- Helpful Hint...
Bathrooms and kitchens add most to the value of your home. Swimming pools and basements rank low on investment return.
- Did You Know...?
You may qualify for reduced property taxes if you?re elderly or disabled, says The Wall Street Journal Lifetime Guide to Money (Dow Jones & Co. Inc, 1997). Visit your local assessor's office to find out.
- Did You Know...?
If you rent out a home for 14 days or less, the income is tax-free, says The Wall Street Journal Lifetime Guide to Money (Dow Jones & Co. Inc, 1997). For rental properties, there can be additional tax benefits.
What Kind of Mortgages Are There?
Basically, there are two types: fixed-rate and adjustable-rate mortgages.
With fixed-rate mortgages, the interest rate remains the same for the entire loan. Loans typically last 15, 20, or 30 years. The longer the loan, the lower the payments, but the more interest you pay. Fixed rates have been around since the 1930s. The standard is the 30-year fixed rate mortgage.
Adjustable-rate mortgages (ARMs), established in the 1980s, reflect the market rate. The initial rate is often lower; the rates will change at a designated time (such as annually). The rates may rise, or they may drop, depending on the market. Typically, lenders guarantee "caps," or percentage points beyond which the lending institution will not move the rate for the year and the life of the loan.
Generally, people who expect to stay put for many years in their new home prefer the predictability of fixed rates; others who expect their property to grow in value and who hope to sell it in the near future often choose ARMs.
There are many other types of mortgages. For example, a wraparound mortgage is when you take over the seller's mortgage. You pay it off at their (often low) rate. The other money owed is charged at the current interest rate.
Reverse mortgages are popular with elderly people who borrow against their house. The lender pays them tax-free money each month, and then takes the house in payment at a designated time. But be careful: Reverse mortgages are typically a much better deal for the lender than the borrower. And they are very risky.
- Did You Know...?
You can get weekly-updated rates from Freddie Mac.
- Did You Know...?
With the tough economy, Bankrate.com suggests applying for the 30-year mortgage, even if you can afford the 15-year one. Then, pay more than amount due each month, as if it were a 15-year mortgage, which will build equity and shorten your loan. And when times get tough, you can rest easy, with a lower amount due each month. Make sure your mortgage does not have pre-payment penalties.
- Did You Know...?
The Mortgage Bankers Association reports that most monthly mortgage payments include payments on the principal, the loan interest, and payments into an escrow account (for property taxes, etc.).
Will I Qualify for a Mortgage?
Will you qualify? Take these steps to find out:
- Determine your debt-to-income ratio, advises Beth Kobliner in "Get a Financial Life" (Fireside Book, Simon & Schuster). When determining a mortgage, lenders believe your future monthly housing costs (principal, interest, property taxes, insurance, etc.) should not exceed 28% of your pre-tax monthly income. Lenders also believe that your monthly debts (car loans, school loans, credit card debt, and so on) plus your future housing costs should not exceed 36% of your income.
- Get a copy of your credit report to see if there are any errors. When you take a loan to finance your new home, your lending company will ask a credit bureau to compile a credit report — essentially proof that you paid, or didn't pay, your debts on time. Lenders want to know if you can afford to buy the home (the rule of thumb: 2.5 times your total annual income). Details of your credit history comes from credit card companies, banks, department stores, and other institutions from whom you may have borrowed or bought or credit. Your report will also list your current debt, and how long it will take to pay it off. Credit reporting agencies include Trans Union, Experian, and Equifax. If you find errors, Bankrate.com offers tips to fix them.
Bankrate.com ("4 Secrets to Successful Mortgage Negotiations," by Dorothy Rosen) also suggests that you find out your FICO score. Fair Isaac assigns you a three-digit number that lenders use to determine your creditworthiness.
- See if you can get pre-qualified for a mortgage at any bank or lending institution. By sharing information such as debts and earning power, you can find out how much a mortgage you can afford, or how much you need to make to qualify for a certain mortgage.
- Did You Know...?
A recent study by Ohio State University, published in the February 2001 issue of Social Science & Medicine, suggests that stress from debt translates to sickness, including heart attacks and insomnia.
- Did You Know...?
Points are an up front interest change paid to the lender. Each point is 1% of the mortgage. Typically, lenders charge 2-3 points. Points are deductible, so keep a receipt, advises The Wall Street Journal Guide to Understanding Personal Finance (Lightbulb Press).
- Did You Know...?
The annual percentage rate (APR) is the interest rate you pay on the loan.
What Are the Closing Costs?
According to Everyone's Money Book (Jordan E. Goodman, Dearborn Trade, 2001), closing costs typically amount to 2-4% of the cost of your new home. They include:
- First mortgage payment
- Mortgage application fees
- Loan origination fees (from the bank to process your loan)
- Points to the lender
- Loan assumption fees (if you have a wraparound mortgage)
- Mortgage insurance premiums
- Credit report fees
- Survey, inspection, and appraisal fees
- Recording deed fee
- Escrow account reserves for the upcoming year (for insurance and property taxes)
- Legal fees
- Title search fees
- Did You Know...?
The Federal Housing Administration developed new home ownership initiatives, including Home ownership Bridal Registry Accounts, which encouraged couples planning to get married to establish a bridal registry savings account in order to help them accumulate the down payment necessary for purchasing their first home together.
Should I Refinance My Mortgage?
Put simply, refinancing means paying off your old mortgage with a new one. Most lenders require that you have 10% equity in your home before you refinance.
There are many reasons to refinance your mortgage. First, interest rates may be lower than when you first got your mortgage. If they are 2 percentage points below your current rate, it might be time to "refi."
You may also refinance if you want to trade in your adjustable rate mortgage for a fixed rate one. According to Mortgage101.com, "if you took out an ARM in the past two years or so, you're probably paying 7.75% to 8.5%. By switching to a fixed-rate loan today, you will not only reduce your payment, you will also lock in an attractive rate for as long as you own your home."
If you're considering refinancing your loan, make sure think about the costs associated with the process (it can incur the same closing and opening costs as your first mortgage), and how long you want to stay in the home (as it might take years to recoup the costs).
- Did You Know...?
Mortgage101.com reports that refinancing points, although paid up front, must be deducted over the life of the loan and not just the year in which you paid. There is one exception, however: If the new loan is specifically for home improvements.
- Did You Know...?
That means refinancing your loan for more than it's worth. If you only owe $100,000, apply for $125,000 and use the $25,000 difference to save for emergencies, or pay existing debts at a lower interest rate.
- Helpful Hint...
You can also refinance personal loans, car loans, and home equity loans.
- Did You Know...?
Fannie Mae, the Federal National Mortgage Association (www.fanniemae.com), Freddie Mac, the Federal Home Loan Mortgage Corporation loans (www.freddiemac.com), and Ginnie Mae, the Government National Mortgage Association (www.ginniemae.gov) are private companies owned by the federal government to help organizations offer loans to first-time buyers. These loans are called different names by different institutions. Generally, you need a good credit record to qualify.
- Did You Know...?
The national median existing-home price was $148,100 in September 2001. The median price of a new home in September 2001 was $162,400, says the National Association of Realtors in the Real Estate Intelligence Report. The mortgage is just the beginning. Don't forget to factor in property taxes, routine maintenance costs, emergency repairs, higher utility bills, and renovations.
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*Note: This material is being provided for informational purposes only. Neither New York Life nor its agents provide legal, tax or accounting advice. Please contact your own advisors for legal, tax and accounting advice.
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